With all the allegations of Mt. Gox’s automated trading bot, which has bot dubbed “Willy”, algorithmic trading is getting a bad rap. However, using bots to trade on the financial markets is a long-established and legitimate activity and it’s lighter than anywhere ter the cryptocurrency markets.
So, how do thesis bots work, and can they truly make you money?
Trading bots are software programs that talk directly to financial exchanges, and place buy and sell orders on your behalf. They make those decisions by watching the market’s price movements, and reacting according to a set of predefined rules.
Joseph Lee is living proof that they can make money. Lee, who founded derivatives exchange BTC.sx, based its trading engine on algorithmic trading bots that he wrote himself, and used inbetween 2011 and 2013.
He claims to have turned a elementary $100 buy order into $200,000 ter profits using his private software army. While that seems astonishing, the demon is te the detail, of course: a lotsbestemming of that price increase stems from the massive price increase ter bitcoin late last year.
Te fact, the verdadero profits are far more insignificante, he has said, so don’t expect to install a plug-in and write your own rags-to-riches story.
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Lee, who claims that his bots shifted 10% of the market’s entire volume te the early days, embarked using his methods when the price sat at $2-$Four vanaf bitcoin.
Lee’s very first trading bot used inter-exchange arbitrage, noticing differences te prices inbetween orders on different exchanges, and buying on some exchanges while selling on others.
“I wasgoed essentially taking liquidity from a market where there wasgoed some and injecting it into a market where there wasn’t,” he explained. Back then, Mt. Gox predominated the market, and other exchanges had poor pricing because their supply of bitcoins wasgoed limited.
“So, I bought for cheap on Mt. Gox and sold them to other markets. I bought a loterijlot of bitcoin into tertiary markets.”
Ter brief, he acted spil a market maker on less-established exchanges.
Lee may have written his own bots, but today, the bitcoin trading bot market is far more established, with several available off the shelf.
Examples include Butter Bot, which offers an online trading bot accessed via a Google Chrome plug-in, and Haas Online, which sells a Windows-based individual trading server. CryptoTrader offers a trading bot marketplace, which permits people to develop bots using different trading strategies, and then rent them to others.
Trading by algorithm isn’t fresh te the financial world: companies ter the conventional financial markets have bot using the method for years. Lee said, however, that the bitcoin exchange community is one of the very first where exchanges grant customers’ computers rechtstreeks market access (DMA).
This enables individual traders to have their pc access the exchange’s electronic order books directly. That’s a service normally only available to brokers and investment houses te the conventional markets.
“Te the past, it wasgoed the people who had the means to pay for a $Ten,000-plus a year Bloomberg terminal with an API connection who could attempt their mitt at bot trading,” Lee explained.
So, why isn’t everyone doing it?
Pablo Enunciado, founder of Butter Bot, says that bots aren’t a ‘fire and leave behind’ technology that enable dilettantes to make money without attempting:
“Trading bots require users to have at least a basic understanding of the market, need to be modified and tweaked by the user according to the predominant market conditions, and also according to their own risk profile.”
Trading bot strategy
Lee commenced off capitalising ter a very inefficient market, where exchanges with sufficient liquidity could be counted on one palm.
The situation while still needing improvement is at least a little better now. Opportunities for inter-exchange arbitrage still exist, but he recommends using technical analysis bots.
But trading isn’t necessarily based on technical analysis alone. It’s difficult to program a pc to react to fundamental market conditions such spil, say, rumours about the Chinese government taking a fresh stance on bitcoin, or the latest bitcoin-based black market trading webpagina shutting down.
Many bots will use an exponential moving media (EMA) spil a embarking point. Thesis averages track market prices overheen a set time span, and bots can be programmed to react to what that price does such spil moving beyond certain thresholds.
“If you have a conservative appetite, choose to trade on a slower fundament,” Lee advised. “If you picked daily rather than hourly periods, it’s generally seen spil a safe bet to get involved ter the basics of trading, let alone bot trading.”
Others suggest tweaks to the EMA treatment.
“If you look to the fattest downside of an EMA then you see it’s almost always to late. And this is the part that can be improved,” said Stephan den Haas, founder of the Haas Online trading bot company, adding.
“This improvement could be done by using a DEMA [dual exponential moving promedio] or TEMA [triple exponential moving promedio] instead. Those have the capability to react swifter then the EMA and their calculation is EMA-related, so it looks the same while it gives off better momentum.”
There are still other methods, he pointed out, such spil relative strength indicators and regression analysis.
“This type of analysis works ideally for processes (te this case a price market) that are unstable,” he says, te a description which seems to sum up the roller-coaster world of bitcoin.
“Using that gegevens, it can make good sense of what’s to be expected te the [. ] future.”
However, technical analysis is a discipline, and thesis things are indicators, not strategies. You’re still going to have to come up with your own set of trading rules, if you’re going to tell a bot how to make decisions.
“The indeed good strategies are kept secret and closed source,” says Eslogan. “That’s done by everyone: the mid [and] high level [traders] and clearing houses. It’s hard for a trader who’s fresh to understand the market.”
BTC or Bust, the creator of the Crackin’ Kritiseren bot found on Cryptotrader, points to a set of algorithms te a library of technical analysis algorithms known spil TA-Lib, along with custom-built indicators developed by the bot author. Thesis are typically combined to find buy and sell signals ter the market, BTC or Bust told CoinDesk.
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Bots can be programmed to be predictive or reactive, or a combination of both, using thesis combined algorithms, it said, explaining:
“For example, let’s say the bitcoin price is crashing. A predictive algorithm might begin buying spil it expects the price will quickly rebound, while a reactive algorithm might commence selling spil it sees the price is pulling down. Both types have their advantages and disadvantages the challenge is to have the bot employ the keurig strategy at the keurig time.”
The capability to set thesis strategies is one of things that will zekering bots from unbalancing the market. Even if lots of people use them, the theory goes that the different strategies they employ would zekering them all moving the market ter one direction and creating an químico bubble or worse, a ‘flash crash’.
Not for everyone
Is bot trading for you? Possibly. They opoffering a diversity of advantages, not least of which is the capability to diligently trade on your behalf, 24/7, and the capability to liquidate all of the emotion from trading (assuming you don’t barge te and terminate them when you’re feeling irrationally antsy).
On the other arm, if you don’t have the financial smarts to waterput together a trading strategy, then bots could simply end up automating a set of poor market trading decisions.
For many, then, who believe ter bitcoin’s long-term potential, the most basic trading strategy could be buy-and-hold.
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Whether or not you determine to automate your trades, the basic rules apply: don’t trade more than you can afford to lose, and don’t go into any investment without at least a basic understanding of what you’re doing.
Disclaimer: Statements te this article should not be considered investment advice, which is best sought directly from a qualified professional.
Autómata pic via Shutterstock
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